(December 2010) Northeast Utilities buys NStar in $4.3 billion stock deal; Toyota Tsusho buys into Oyster Creek Cogeneration; ITOCHU buys into wind farm; Atlantic Power buys wood-fired...
The New Art of Plant Acquisition
Forget the mega merger as a means to acquire new power plants. FERC’s new rules may offer a better path.
the market-power tests of the section 203 and MBR filings, and further suggests key elements to consider when assessing competitive impacts of a proposed transaction. These regulatory elements also provide investors a checklist on how to weigh their acquisition choices.
FERC’S Market-Power Analyses
Market power analyses for both Section 203 and MBR filings are designed to examine two different questions. The goal of FERC’s Section 203 market-power analysis is to examine only the market power arising from the transaction. FERC takes as given the overall degree of competitiveness or market power held by buyers, sellers, or individual segments. Thus, the FERC threshold for approving an asset transfer emphasizes the impact of the transaction on competition, i.e., the change in market concentration. It accepts the status quo of the applicant even if the applicant operates in a highly concentrated market and has a market share exceeding 20 percent, a threshold FERC uses in determining whether MBR authority should be granted.
The market-power analyses for MBR applicants examines whether a seller is likely to have market power. Two screen tests are required; the Pivotal Supplier Screen (PSS) and the Market Share Screen (MSS) analyses. Between these two screens, the MSS is arguably the more challenging for an investor-owned utility (IOU) because of FERC’s rigid formula. Under the MSS, an MBR seller with a market share exceeding 20 percent fails this test. It is therefore possible that a Section 203 applicant would be granted a transfer of the asset; however, because it has MBR authority, its acquisition would be denied by FERC. This is an undesirable outcome.
Although FERC has not yet ruled on this particular situation, similar cases have been observed. Arizona Public Service (APS) and its affiliates filed for a Section 203 approval when it acquired a 450-MW natural-gas combustion turbine power plant from PPL Sundance Energy LLC. On May 6, 2005, FERC approved the transaction but requested APS to file CIS, 9 even though its May 2004 triennial MBR for its control area had not been granted by FERC. 10
In preparing market-power analyses for the APS CIS filing, 11 APS had claimed that its relevant market expanded beyond the APS control area to cover Salt River Project’s (SRP’s) control area. Nevertheless, it provided the analyses for both the APS control area market and the expanded APS/SRP market. APS failed the FERC market-share screen test for its control-area market, but passed when the market was defined as the combined APS/SRP market. APS voluntarily submitted the DPT analysis to demonstrate that there are no market power concerns relating to APS and to its affiliates receiving MBR authority in its control area. 12 After almost two years, FERC has revoked APS and its affiliates’ MBR authority for power sales in the APS control area. 13
In the Exelon-Public Service Electric and Gas (PSEG) merger, the merged firm would fail the FERC MBR tests. 14 Even with the amount of mitigation proposed by the merging parties, the merged entity’s market share may exceed the 20 percent threshold in several periods. 15 It will be